How much home can you afford?
CHIP POLI – The last
decade of housing market uncertainty has left many prospective home buyers wary
and confused about how much home they can afford.
Many home buyers aim high and end up in a foreclosure or short sale bidding war. Others shoot low and miss the target altogether.
The key is to educate yourself about the home buying decision-making process.
Here’s a good rule of thumb: You likely can afford a home that is worth about five to six times your annual salary.
For example, if you earn $50,000 you have a good shot at a home worth $250,000 to $300,000.
Of course that means you must have a stable job and meet other requirements that make you a good risk for the lender.
Here are the factors you must consider to assess how much home you can afford.
• Finances. Get a clear view of your current financial picture, including income, debts, and savings. As a rule of thumb, your total debt-to-income (DTI) ratio shouldn’t exceed 43 percent. You’ll need money to pay fluctuating monthly costs including, utilities, gas, groceries, household needs, and other items.
• Credit. Your credit score is monumentally important when considering a home purchase. Some types of loans allow for a lower credit rating, but if your FICO credit score is on the low side (under 700), you should start trying to shore it up immediately. That can take some time.
• Credit dings. Lenders will also consider past bankruptcies and loan defaults and other bad marks. Be prepared to disclose this kind of information unless its seven or more years old.
• Down payment. Calculate how much you can offer as a down payment. If you can’t pay 20 percent down, expect to pay mortgage insurance to cover the lender’s risk for allowing you more leverage.
• Mortgage interest rates. The interest rate that you are able to secure from your lender, which is largely based on your credit score, should figure into your calculations. Run the numbers for several different rates based on the current range of available rates.
• Closing costs. Closing costs are inevitable. These include “points,” you can pay at closing in exchange for a lower interest rate. If you plan to remain in a property for a long time, paying points can save you a chunk on interest over the long run.
• Insurance, taxes. Consider how much you’ll have to pay for homeowner’s insurance, property taxes and homeowner association dues, if any.
• Loan term. The terms of your mortgage will affect your monthly payments. The longer the term, the lower the payments. The shorter the term, the less interest you’ll pay.
• Property. They type of home you’ll buy will impact your affordability. For example, buy a fixer-upper and you don’t want to spend big on the price. You’ll need money to repair, improve and upgrade.
• Loan types. Many varieties of home loans are available – conforming, jumbo, Federal Housing Administration (FHA), Veterans Affairs (VA) and many more. Some loans don’t require 20 percent down. Talk to a professional about which loan is best for you.
• Home prices. When you find that dream home, do your homework. Be aware of comparable property (“comps”) prices, to be sure you aren’t spending too much. If recent home sales in the neighborhood have gone for a few percent lower than asking price, you’ll want your bid to reflect that market condition.
Be sure to step back and take stock of what you can truly afford. Lenders can offer you more mortgage than you truly need.
If you are a big spender on clothing, eating out, travel, or other pursuits, consider how much you’ll have to cut back or how much less home you can afford.
Be prepared for unexpected costs for the home, you and your family.
Online calculators can help you calculate what you can afford before you go shopping.
Chip Poli, is CEO of Poli Mortgage Group, Inc. in Norwood, MA. Poli has 20 years of experience in the real estate industry and has been consistently ranked in the top 1% of mortgage originators in the country.
Many home buyers aim high and end up in a foreclosure or short sale bidding war. Others shoot low and miss the target altogether.
The key is to educate yourself about the home buying decision-making process.
Here’s a good rule of thumb: You likely can afford a home that is worth about five to six times your annual salary.
For example, if you earn $50,000 you have a good shot at a home worth $250,000 to $300,000.
Of course that means you must have a stable job and meet other requirements that make you a good risk for the lender.
Here are the factors you must consider to assess how much home you can afford.
• Finances. Get a clear view of your current financial picture, including income, debts, and savings. As a rule of thumb, your total debt-to-income (DTI) ratio shouldn’t exceed 43 percent. You’ll need money to pay fluctuating monthly costs including, utilities, gas, groceries, household needs, and other items.
• Credit. Your credit score is monumentally important when considering a home purchase. Some types of loans allow for a lower credit rating, but if your FICO credit score is on the low side (under 700), you should start trying to shore it up immediately. That can take some time.
• Credit dings. Lenders will also consider past bankruptcies and loan defaults and other bad marks. Be prepared to disclose this kind of information unless its seven or more years old.
• Down payment. Calculate how much you can offer as a down payment. If you can’t pay 20 percent down, expect to pay mortgage insurance to cover the lender’s risk for allowing you more leverage.
• Mortgage interest rates. The interest rate that you are able to secure from your lender, which is largely based on your credit score, should figure into your calculations. Run the numbers for several different rates based on the current range of available rates.
• Closing costs. Closing costs are inevitable. These include “points,” you can pay at closing in exchange for a lower interest rate. If you plan to remain in a property for a long time, paying points can save you a chunk on interest over the long run.
• Insurance, taxes. Consider how much you’ll have to pay for homeowner’s insurance, property taxes and homeowner association dues, if any.
• Loan term. The terms of your mortgage will affect your monthly payments. The longer the term, the lower the payments. The shorter the term, the less interest you’ll pay.
• Property. They type of home you’ll buy will impact your affordability. For example, buy a fixer-upper and you don’t want to spend big on the price. You’ll need money to repair, improve and upgrade.
• Loan types. Many varieties of home loans are available – conforming, jumbo, Federal Housing Administration (FHA), Veterans Affairs (VA) and many more. Some loans don’t require 20 percent down. Talk to a professional about which loan is best for you.
• Home prices. When you find that dream home, do your homework. Be aware of comparable property (“comps”) prices, to be sure you aren’t spending too much. If recent home sales in the neighborhood have gone for a few percent lower than asking price, you’ll want your bid to reflect that market condition.
Be sure to step back and take stock of what you can truly afford. Lenders can offer you more mortgage than you truly need.
If you are a big spender on clothing, eating out, travel, or other pursuits, consider how much you’ll have to cut back or how much less home you can afford.
Be prepared for unexpected costs for the home, you and your family.
Online calculators can help you calculate what you can afford before you go shopping.
Also, get a lender to run the numbers so you have a
better idea of your ability to qualify for a loan and for how much. If you get
pre-approved, you’ll be a better competitor in today’s market.
A good mortgage lender also can help you zero in on the fine details of your
affordability and help you shop around for a home loan that fits.Chip Poli, is CEO of Poli Mortgage Group, Inc. in Norwood, MA. Poli has 20 years of experience in the real estate industry and has been consistently ranked in the top 1% of mortgage originators in the country.
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